Layoff Survival Guide: What to do with your 401(k)

Guest blogger Stephanie graduated from MIT in 2006 and started working at a start up. After two years there, she was laid off, and learned firsthand the ins and outs of surviving a layoff and searching for a new job. She's now at a new job, and loving it. She'd love to help you with any of these transitions!
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A good friend of mine recently got laid off. And, since I went through this about a year ago, I’ve got plenty of advice.

I’ve decided to start a little series, the Layoff Survival Guide. I’ll be answering questions that she has, and will be more than happy to answer any questions you have. I’m not a professional financial adviser or career coach, but I’ve learned a lot about surviving a layoff, and the transitions and decisions that come with it. Plus I might have some advice on finding a new job. I already have a few posts for some of these topics (linked to in previous sentence), but I don’t mind focusing on a specific question or topic.

So, ask away! I’ll try my best to find the information you are looking for!

One of the questions my friend sent me was: What do I do with my 401(k)?

I realize that plenty of people have posted about what to do with your 401(k) after you leave your job (either voluntarily or involuntarily). A really good guest post by The Working Dollar at Get Rich Slowly describing your options can be found here.

Still, here’s my own view of your options:

Keep your money where it is. This isn’t the option for everyone. In fact, it depends on the rules of your company and the firm they run the 401(k) through. There’s usually a certain amount of money you need to have in the account in order to keep it there. If you’re happy with your portfolio there, and you are allowed to keep your money there, then you can go ahead and keep it around. If you aren’t able to keep your money there, or you don’t like how your money is invested, or if they’ll start charging a fee or impose other rules you’re not comfortable with, then you might want to consider the other options. The benefit to keeping it (if you can) would be that you wouldn’t have to “sell” your funds, and could hope to make back the losses from the crummy stock market performance. When my boyfriend left his last job, he just kept all his investments at the old company, since he actually had really good investment options there, whereas I was not happy with my options after I got laid off, so I rolled my 401(k) over.

Roll over to an IRA (or Roth IRA). If you can’t (or don’t want to) keep your money where it is, you can roll it over to an IRA. Most investment companies (like Fidelity, Vanguard, or T. Rowe Price) (click those to go directly to their rollover sites) have an option to roll your money over from your 401(k) into an IRA. The important thing to remember here is that you should check with both the organization that has your old 401(k) and the company that you want to roll over your money with, to see how you can move the money without incurring fees or taxes. They’ll tell you what to do! You can now also roll over your money into a Roth IRA, but will need to deal with the taxes there (pre-tax money to post-tax money). The benefit of having an IRA is that you have more choices on what to do with your money. It’s an investment vehicle, where you can buy all sorts of different investments…not just the 10 or so mutual funds that your company lists for you. Another good post about IRAs (from Get Rich Slowly) can be found here.

You also have the option to Roll over your old 401(k) into a new employer sponsored plan. I don’t know as much about this option, but it seems that it would require you to have your new job already. You’d need to be able to keep your retirement savings somewhere (i.e. the old 401(k)) while you wait for your new plan to take effect.

And, finally, my least favorite option, Cash it out. I don’t recommend this unless you have a really good reason to. You’ll be hit with taxes all at once, and will likely have to face fees as well, quickly dwindling down the actual amount you will get.

What did I do? Since I was not happy with my investments in my old 401(k), I decided to roll my money over to an IRA. And since I already had a Roth IRA at Fidelity, I decided to open a rollover IRA there. It was pretty darn easy, and they answered all the questions and concerns I had. Plus they have a lot of investment options, many of which don’t require fees. I’ve heard good things of lots of the other investment companies, so take a look around your options before committing to a specific company.

Vanguard also lays out the pros and cons of each option (as does Fidelity). Like I said before, this information is everywhere. But I just figured I’d lay it out again for anyone looking for some guidance.

Have any questions about what I wrote? Suggestions? Corrections? I don’t claim to be a financial adviser or expert, so hopefully you’ll take what I’ve written and run with it (and if there are mistakes, I’ll be sure to edit it to reflect corrections you submit).

Also, what other questions do you have about the transition from employment to unemployment? I’ll be answering them here! Leave a comment or email me the question at graduatedlearning@gmail.com.